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Copyright 2013 Pearson Education 6-1
International
BusinessEnvironments & Operations
14e Global Edition
Daniels
Radebaugh
Sullivan
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Copyright 2013 Pearson Education 6-2
Chapter 6
International Tradeand Factor Mobility
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Learning Objectives To understand theories of international trade
To explain how free trade improves globalefficiency
To identify factors affecting national tradepatterns
To explain why a countrys export capabilities aredynamic
To understand why production factors, especiallylabor and capital, move internationally
To explain the relationship between foreign tradeand international factor mobility
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Introduction
Learning Objective 1:
To understand theories of internationaltrade
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Laissez-Faire vs. Intervention
Trade theory helps answer
What products should we import and export?
How much should we trade?
With whom should we trade?
Laissez-faire approach
Free trade theories absolute advantage andcomparative advantage
Intervention approach
Mercantilism and neomercantilism
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Laissez-Faire vs. InterventionInternational Operations and Economic Connections
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Theories of Trade Patterns
Theories explore
country size
factor proportions
country similarity
Theories explore trade competitiveness
Product life cycle
Diamond of national advantage
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Trade Theories and BusinessWhat Major Trade Theories Do and Dont Discuss: A Checklist
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Factor Mobility Theory
A countrys competitiveness depends on
quality and quantity of production factors
Land
LaborCapital
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Interventionist Theories
Theories that support governmentintervention in the flow of trade
Mercantilism
Neomercantilism
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Mercantilism
Mercantilism countries should exportmore than they import
Maintain a favorable balance of trade
trade surplus
Avoid an unfavorable balance of trade
trade deficit
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Neomercantilism
Neomercantilism run an export surplusto achieve social or political objectives
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Free Trade Theories
Two theories that support free trade
Absolute advantage theory
Comparative advantage theory
Market forces should determine trade specialization
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Theory of Absolute Advantage
Theory ofabsolute advantage different countries produce some goods more
efficiently than others
Free trade brings Specialization
natural advantage
acquired advantage
product technology process technology
Greater efficiency
Higher global output
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Theory of Absolute AdvantageProduction Possibilities under Conditions of Absolute Advantage
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Theory of Comparative Advantage
Theory ofcomparative advantage
free trade can increase global output even ifone country has an absolute advantage in the
production of all products Consider
comparative advantage
absolute disadvantage
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Theory of Comparative Advantage
Production Possibilities under Conditions of Comparative Advantage
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Theories of Specialization:Assumptions and Limitations
Learning Objective 2:
To explain how free trade improves globalefficiency
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Theories of Specialization:Assumptions and Limitations
Theories of specialization makeassumptions that may not be valid full employment
economic efficiency
division of gains
two countries, two commodities
transport costs
statics and dynamics
services
production networks
mobility
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Trade Pattern Theories
Learning Objective 3:
To identify factors affecting national tradepatterns
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How Much Does A Country Trade?
Theory of country size
large countries depend less on trade thansmall countries
Large countries usually export a smaller portion of output and import a
smaller part of consumption
have higher transportation costs for foreign
trade
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What Does A Country Trade?
Factor proportions theory
factors in relative abundance are cheaper thanfactors that are relatively scarce
But production factors are not homogenous
labor
Process technology
capital versus labor
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What Does A Country Trade?Worldwide Trade by Major Sectors
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Choosing Trading Partners
Country similarity theory
most trade occurs among developed countries
share similar market characteristics
produce and consume much more thandeveloping countries
Trading partners are affected by
Cultural similarity
Political relations between countries
Distance
Th S i d
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The Statics andDynamics of Trade
Learning Objective 4:
To explain why a countrys exportcapabilities are dynamic
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Product Life Cycle Theory
The product life cycle theory
the production location of certainmanufactured products shifts as they gothrough their life cycle
Four stages
Introduction
Growth
Maturity Decline
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Product Life Cycle TheoryLife Cycle of the International Product
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Diamond of National Advantage
The diamond of national advantage
Four conditions are important for gaining andmaintaining competitive superiority
Demand conditionsFactor conditions
Related and supporting industries
Firm strategy, structure, and rivalry
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Diamond of National AdvantageThe Diamond of National Competitive Advantage
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Factor Mobility Theory
Learning Objective 5:
To understand why production factors,especially labor and capital, move
internationally
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Why Production Factors Move
Factor mobility theory
focuses on why production factors move, theeffects of that movement on transformingfactor endowments, and the impact ofinternational factor mobility on world trade
Capital and labor move internationally to
gain more income
flee adverse political situations
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Effects of Factor Movements Factor movements alter factor
endowments Factor movements can be substantial for
some countries, and insignificant for
others The movement of labor and capital are
intertwined Pros and cons of outward and inward
migration Brain drain Remittances
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Trade and Factor Mobility
Learning Objective 6:
To explain the relationship betweenforeign trade and international factor
mobility
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Trade and Factor Mobility
There are pressures for the mostabundant factors to move to areas ofscarcity
The lowest costs occur when trade andproduction factors are both mobile
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Trade and Factor MobilityUnrestricted Trade, Factor Mobility, and the Cost of Tomatoes
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Trade and Factor Mobility
Factor mobility through foreign investmentoften stimulates trade because of
the need for components
the parents ability to sell complimentaryproducts
the need for equipment for subsidiaries
In What Di ection
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In What DirectionWill Trade Winds Blow?
Issues to consider
1. Displacement of jobs as developed countriesshift production to more rapidly developingcountries
2. Relationships among land, labor, and capitalwill continue to evolve
3. Continued trend toward a more finely tunedspecialization of production among countries
In What Direction
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In What DirectionWill Trade Winds Blow?
Monitor
As economies grow, efficiencies of multipleproduction locations also grow because theycan all gain sufficient economies of scale
Small-scale production methods may enablecountries to produce many goods efficiently fortheir own consumption
Output from 3D printers
Services are growing more rapidly thanproducts as a portion of production andconsumption within developed countries
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